If a nation is earning more than it spends the net effect will be to build up savings, except to the extent that those savings are being used for investment. If consumers can be encouraged to spend more instead of saving; or if the government runs a fiscal deficit to offset private savings; or if the corporate sector divert more of their profits to investment, then any current account surplus will tend to be reduced. However, in Germany amended its constitution to prohibit running a deficit greater than 0.
The problems with the Eurozone Andrea Boltho, Wendy Carlin History shows that — lacking an automatic balance-of-payments adjustment mechanism as under the gold standard — fixed exchange rate arrangements tend to break down under the attacks of financial speculation, but also that these attacks are encouraged by sustained divergences in prices, wages, and productivity.
Countries with higher inflation and lower productivity growth typically display persistent public-sector deficits and rising debt-to-GDP ratios, which on occasion have become the trigger of confidence crises and speculative attacks in financial markets.
These expectations proved delusional; the sovereign debt crisis in the Eurozone in started as a fully-fledged balance-of-payments crisis Baldwin et al. This happened because monetary union did not eliminate market segmentation and Balance of payment and adjustment to rigidities, while fiscal policies stayed national and continued to respond to national goals, with inadequate attention to the convergence requirements of monetary union.
The problem was brought back to the surface by the Greek debt crisis, early inwhich later turned into a sovereign debt crisis of the entire periphery. This latter crisis undermined mutual confidence amongst the member states concerning the respect of budgetary rules and reintroduced, in the eyes of private investors, a currency-redenomination risk.
The confidence and liquidity problems are at present muted by the ECB bond-buying programme, but they are likely to re-emerge when the programme ends, if underlying imbalances in competitive positions and excessive public debt levels are not redressed. This column describes the unresolved adjustment problems confronting the Eurozone and places them in historical perspective by comparing developments in key real economic variables under EMU with those observed under the Bretton Woods system.
This comparison must, of course, be placed in proper context; while Bretton Woods covered much of the world economy, the Eurozone represents less than one-fifth of world GDP and about one-quarter of world trade.
And yet the comparison is useful to highlight the different effects of the two systems on participating countries. The main finding is that the Eurozone is afflicted by a strong deflationary bias and that, therefore, under current trends, deep economic and social strains will continue to project a dark cloud over its future survival.
The result was startling: In the years preceding the Global Crisis, all Eurozone partners lost out heavily in their wage and price competitiveness relative to Germany.
These losses were reversed in the ensuing years by the countries undertaking tough adjustment programmes to regain market access — i. Greece, Ireland, Portugal, and Spain — but not by the other partners, including France and Italy as well as other core countries.
Our updating of Graphs 5. Eurostat for productivity and ULC; Ameco for compensation per employee. The upper quadrant of Figure 2 depicts the resulting evolution of real effective exchange rates REERs of Eurozone partners. As may be seen, the peripheral countries display a large real appreciation, only partially corrected since the Crisis, while the core countries excluding Germany display a moderate real depreciation.
Germany stands out as the lower-bound outlier, with substantial real depreciation against all other Eurozone members in the pre-crisis period slowly reduced in the post-crisis years.
The large deficit in the periphery closely mirrors the ample surpluses in the core. After the Crisis, deficits shrank abruptly with falling domestic demand, as peripheral countries entered deep recessions; the surpluses were largely reabsorbed in core countries with the notable exception of Germany and the Netherlands.
This development seems underpinned by a trend increase in aggregate saving, notably by the corporate sector, and a trend decrease in investment, relative to GDP; in the meantime the public sector deficit was all but eliminated, adding to aggregate domestic savings. After the Crisis re-established the diversity of national currencies and the balance-of-payment constraint, domestic demand and output growth in the rest of the Eurozone fell below those observed in Germany as reflected in the relative slopes of the curves in Figure 2.
In Figure 2 I have also reported the correlations between the current-account balances in the core and the periphery — calculated over yearly levels and absolute changes.
One wonders to what extent this may have become a structural feature of the Eurozone; for countries that cannot correct their real appreciation relative to Germany, domestic demand and output growth cannot exceed that observed in Germany without pushing the country against the balance-of-payments constraint and eliciting prompt punishment by financial markets.
The ECB provision of liquidity may offer temporary respite — as it has indeed done during the Crisis Micossi a — but it cannot remove the constraint. In sum, Germany has emerged as a kind of real economic anchor of the Eurozone, forcing its preference for high savings and slow growth of domestic demand onto the other members.
However, this slow growth is incompatible with the need to reduce debt and reabsorb much higher unemployment and social distress.
At the same time, very low inflation further compresses the margin for change in relative prices and wages. Real effective exchange rate, current account and domestic demand Note: REERs deflated by unit labour costs in the total economy and computed with respect to EZ 18 trading partners.
Figure 3 casts further light on the depth and persistence of the divergence in fundamentals within the Eurozone. The total factor productivity TFP developments are represented in the upper quadrant. As may be seen, while all Eurozone member countries fall behind the US, the inception of the euro has coincided with an adverse structural break in productivity in the periphery, with no visible sign of recovery as yet.
Elsewhere Micossi bI have argued that lax financial conditions and the shifting composition of output towards non-tradables in the periphery, linked to real exchange-rate appreciation, may help explain these developments. An indirect confirmation may be found in the data on the quality of institutions based on World Bank indicatorsdepicted in the middle quadrant of Figure 2.
They show, after the start of the euro, a deterioration of key institutions that are relevant for economic performance everywhere, but even more strongly in the periphery. While a drop in government effectiveness may be due to some extent to the dramatic cuts in public expenditure required by austerity, there is no reason why the preservation of the rule of law, the control of corruption or the quality of regulation should have worsened in response to the Global Crisis.
A large weight in these results for the periphery is attributable to Italy. Public-debt ratios diminish in Germany and Ireland, but are still increasing in many countries.
TFP, quality of institutions, and public debt Source: Comparing the Eurozone with Bretton Woods exchange-rate arrangements The Bretton Woods fixed exchange-rate system differs from the Eurozone in many important features, including the fact that the former offered a way out of parity changes when confidence problems made financial stresses unendurable, while that option does not formally exist in the latter although the prospect of Grexit has been repeatedly invoked in the European Council in the heat of life-and-death negotiations over the Greek adjustment programme, and markets have no doubt taken notice.
Moreover, in the former system, liquidity creation was in the hands of the central bank providing the reserve currency, the US dollar, while in the latter it is in the hands of an independent institution governed by a Committee the ESCB Governing Council deciding by consensus.I’m preparing to shop for a mortgage and was told those late payments will keep me from getting the best interest rate.I’m requesting a goodwill adjustment since the payments do not reflect my current payment .
The balance of payments is a record of a country's international trade plus the financial transactions that make it possible.
It has three components. The balance of payments is a record of a country's international trade plus the financial transactions that make it .
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The balance of payments, also known as balance of international payments and abbreviated B.O.P. or BoP, of a country is the record of all economic transactions between the residents of the country and the rest of world in a particular period (over a quarter of a year or more commonly over a year).
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